A tale of two cities

Utilities on the US market are trading with substantially different patterns than their Canadian counterparts. Let’s take a look at the stocks and see how to treat utilities on either side of the border, from a technical traders point of view.

 

US Utilities

xlu weekly

We can follow the SPDR Select Utilities ETF for pretty clear view of the pattern for utility stocks in the USA. It’s probably the most widely traded utilities ETF on the south side of the border, so it’s volume profile is representative of the sector itself. As you will note on the weekly chart of XLU above, the market is in a longer termed uptrend for the sector.

xlu

Further analysis of XLU on the daily chart above shows us what could be a minor breakout of a consolidation pattern.  That would need to be confirmed by further price action that stays above $49. Neartermed momentum (stochastics, RSI) is trending up and not yet overbought, while the longer termed momentum indicator MACD is diverging bearishly. General moneyflow (AD line at bottom) is bullish, but moneyflow momentum (top pane) is waning a bit. Relative strength vs the S&P500 is flat. Overall, not a bad looking chart. Utilities are not in their favorable performance season, thus the sector may stay in-line with market performance until the spring – which is when the official outperformance period often begins.

 

Canadian Utilities

 zut

As you will note on the weekly chart for the BMO Utilities ETF above – which tends to be one of the widely followed Canadian Utility ETF’s – the ETF had been range bound for a very long period of time. Only last year did it break its almost impenetrable lid of $16.60. After forming another small level of consolidation at just under $17.30, it looks like the sector is breaking out again.

zut short

On the daily chart, note how moneyflow (AD line at bottom) is dead-flat for ZUT. Like US utilities, the sector has rising momentum that is not yet overbought, but a negative divergence by the longer termed MACD momentum indicator. Unlike US utilities – comparative strength to the S&P500 is favorable. Not shown on this chart is comparable strength to the TSX- so you will have to take my word for it that the sector is also doing better than the broad TSX.

 

Trading tactics

 

Because the trend has been in place on the US utilities sector ETF (XLU) for several years, it’s safe to buy the sector and hold it, while ignoring the “speedbumps” along the way. Keep the stock so long as the trendline holds  if you are a long termed investor who likes the 3.3% current yield on XLU. On the other hand, the Canadian utilities market is not necessarily trending. Yes, the breakout by ZUT is favorable, but the ETF’s history suggests that it can consolidate for long periods. Should ZUT fail to hold its current breakout price of just under $17.30, it could easily fall back towards old resistance (new support) of $16.60. So, the breakout is bullish and warrants consideration for new investors, but it’s not quite as predictable in price behavior as XLU.

 

Keith’s BNN show on Monday

 Click here to view my Globe and Mail article and BNN market commentary, along with my Top Picks from Monday’s MarketCall Tonight show.

 keith-richards BNN

 

8 Comments

  • Hi Keith,

    If I understood correctly, you said that later into February, you plan to put a lot of your cash to work. I wonder if we will get that 3-4% dip we typically get during this month….after what Trump said yesterday. The ramp-up on Thursday was relatively impressive and we closed above 2300. Could this be the time to add most of our cash, instead of waiting any longer?

    Super appreciated. Have a good weekend!
    Matt

    Reply
    • Yes–that’s the question of the day, Matt!!!!!
      I bought a little bit yesterday, but still hold 15% cash–personally I’ll hold the cash another week or so then go in. Statistics are statistics–they suggest a directional bias, but not an absolute.

      Reply
      • Thank you for the answer Keith,

        I think having “missed out” 2 or 3% is not a big deal, if the chances of a draw down were high. The important thing for me is to not “hope” that we get the pullback that “I want”. Then the train could really leave me behind, with Trump as the conductor. And then, I could be 6-8% behind. So I’ll take your advice and wait a few days, however the fact that Trump hasn’t revealed his “lower tax” plan, I doubt we’ll get a “sell on news”. I guess we’ll just have to see!

        My greatest hope is that our government doesn’t do the opposite and raise capital gains tax. Then all this trading we do would get real expensive suddenly!

        Matt

        Reply
        • Re a cap gains tax: Well, somebody’s gotta pay for the Bombardier bailout, the GM bribe, the nannies, the multiple vacations, the 69,000 newly hired government workers (’cause that’s what builds an economy–more government costs!), the refugee costs, and the massive and rising debt.

          Reply
  • HI Keith, is fundamentally Utilities not the best investments in rising rates economy or you just thinking a short trade ?

    Reply
    • Common thought is that rising rates are bad for utilities, however that is usually only the case in rapid rising rates–something that is not likely to happen any time soon. In fact, gently rising rates – assumed – are ok for utilities–was such condidtions implies a decent economy, and thus theoretically more usage and better conditions for the utilities sector.
      That’s about all i can say fundamentally about the sector
      And now, we return to our regularly scheduled Technical Analysis program.

      Reply
  • Good morning Keith,

    You are planning to invest the cash that you are holding in the next week or so. Last december you talked about smart/dumb money spread was very big. Are these samart money holders started to deploy some of their cash?

    Thanks

    Paul

    Reply
    • Smart money remains at 20% confident in market upside, while dumb money sits at 72% bullish according to the statistics just released by sentimentrader.com
      Thats a negative outlook.

      Reply

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